Stubborn Fed Keeps Interest Rates Steady Amid Trump Pressure – No Rate Cut for Now
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Federal Reserve disregards Trump's orders - no move on interest rate reduction
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In defiance of the White House's demands, the Federal Reserve persists in keeping interest rates unchanged, putting them between 4.25 to 4.50 percent. The Fed's decision has sparked critique from President Trump, who has repeatedly urged for lower rates.
The Fed's resistance to Trump's demands is clear, standing firm amidst speculation of coercive measures. At their June meeting, the central bankers signaled potential rate cuts totaling half a percentage point by 2025, still adhering to their projections from March. However, their end-2026 target rate now sits at 3.6 percent, a rise from the earlier forecast of 3.4 percent.
Trump's disapproval of the Fed's stance is evident, as he criticized the central bank chief before the rate decision and even joked about replacing him. In the past, Trump hinted at employing unidentified measures. Economist Alexander Krüger of Hauck Aufhäuser Lampe Privatbank comments, "It looks like Trump is going to have to exercise patience before enjoying the sweet taste of rate cuts."
The Fed's steadfastness in the face of political pressure is a delicate balancing act. The central bank is under pressure to maintain its duty of assuring price stability while avoiding political interference. Lena Dräger, research director at the Kiel Institute for the World Economy (IfW), agrees, stating that the Fed is facing a "precious monetary policy tightrope walk."
The Fed has also lowered its growth forecast for the U.S. economy, expecting a 1.4 percent increase in 2025, down from the previous March prediction of 1.7 percent. The central bank has revised its inflation rate expectation upwards, from 2.7 percent to 3.0 percent.
Although inflation has increased slightly, reaching 2.4 percent year-over-year in May, consumer prices are still climbing slower than anticipated. Tariffs that President Trump implemented on numerous imports in April have had limited impact thus far. Despite the ongoing economic churn, economist Elmar Voelker of LBBW expects the Fed to shift toward rate cuts in the coming months, emphasizing that the current policy hinders U.S. economic growth.
Additional Insights:
- Gradual rate reduction is expected over the next few years, with midpoint projections of the federal funds rate target range ranging between 4.25 to 4.375% by the end of 2025, according to FOMC projections.
- Inflation remains slightly above 2%, and the labor market remains robust, supporting the Fed's caution in adjusting policy.
- Uncertainty surrounding Trump's trade policies and tariffs has another layer added after the Fed's announcement of a trimmed economic growth forecast.
In summary:
- The Fed will not bow to political pressure to lower rates and instead keeps the federal funds rate target at 4.25 to 4.5 percent for now.
- Economists estimate that the Fed will consider gradual rate reduction over the next few years, given current economic conditions.
- Uncertainty surrounding trade policies and tariffs continues to cloud the outlook for the U.S. economy and inflation.
- The Federal Reserve's decision to maintain the interest rates, despite President Trump's pressure, signals a continuation of its employment policy, aiming for price stability and robust business growth amidst potential political interference.
- Amidst tampering expectations from Trump, the Fed's decision to gradually reduce rates over the next few years could impact the finance sector and general-news outlets, as economic growth projections, inflation, and trade policies remain under scrutiny.
